Extreme Spectra of Var Models and Orders of Near‐Cointegration

E. E. Ioannidis and G. A. Chronis

Journal of Time Series Analysis, 2005, vol. 26, issue 3, 399-421

Abstract: Abstract. In this paper, we study the spectral properties of a bivariate vector autoregressive VAR(p) model when a root z0 = ρ0eiλ0 of the determinant of the model's characteristic matrix Φ(z) approaches the unit circle, the border of non‐stationarity. Let Φxx(z), Φxy(z), Φyx(z), Φyy(z) be the polynomial elements of Φ(z). We show that, depending on the relation of the order of z0 as root of det(Φ(z)) with the orders of z0 as root of Φij(z), (i,j ∈ {x,y}), the two marginal spectra may tend to infinity at λ0, while the coherence may tend to unity at λ0. We investigate the conditions under which any of the above will occur, in detail. In the specific case where z0→1, the marginal series will be near‐integrated of certain orders of near‐integration, while there will eventually exist a linear combination of them with a lower order of near‐integration. We study the possible combinations of their orders of near‐integration. Finally, we develop a strategy with the help of which one may define a VAR(p) model with pre‐specified extreme spectral features and give some examples. Beyond the benefits of this latter for VAR model simulation, the analysis has, moreover, implications concerning the adequacy of VAR model fitting.

Date: 2005
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